How Policy Reforms Can Help Alleviate Income Inequality in China

The advent of economic reforms in 1978 has fostered vast changes in China’s landscape, not least the lifting of millions of Chinese out of poverty. And during this period Li writes, the Chinese government’s control over income distribution has weakened as the market has come to play a growing role in the Chinese economy. And yet many non-market factors still have an impact on incomes and their distribution. As a result, since the early 1980s, China’s income gap has, in fact, widened to a varying degree between urban and rural areas and among different geographies and demographics. And since the mid-1990s, in particular, Professor Li argues, income inequality has worsened across the country.

Ultimately, writes Li, many of the sources of income inequality in China can be traced back to public policy choices and constraints. It is true, he says, that, in a global context, income inequality in China is hardly a unique phenomenon. Indeed, over the last 30 years, most countries in the world have experienced income inequality, although it has been more severe in some countries than in others. But, Professor Li suggests, the rate at which the gap is widening in China is “astounding.”

Within 30 years, Li writes, China has transitioned from an egalitarian society into a highly unequal one. Thus from a political vantage point alone, reducing income inequality has become a top priority for China’s leaders. But to solve the problem, Li says, Beijing will need to tackle distortions in the labor market in particular.

Li’s policy memo surveys the central features of income distribution in China today. It identifies structural and policy drivers that have exacerbated the problem and recommends changes, especially to China’s labor market, aimed at helping the country navigate the economics of rising inequality.

Get Our Stuff